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Archive for the 'Pharma' Category

The Indian markets have been under pressure of perceived weakness in earning capacity of the companies in view of the slow down effect of the US economy. This part is not understood by me as if there is slow down in US the fund managers will look towards places where money can be still made and India happens to be an ideal place. Here the slow down is more in mind than in practice for in an economy that is on slow down path the job opportunities plummet. In India the biggest problem for the enterprises has come in the form of non-availability of workers (blue collar or white collar) and the experts . They have plans and are offering unheard of salaries here. It is now acknowledged fact that the salaries have gone up maximum here in India in percentage terms. So, the argument of the impending slow down is untenable.

Secondly, the commercial vehicle sales take a down turn right before the slow is noticed. This also yet not the case in India.The cap-goods industry suffers from dearth of orders and this too is not case here.The steel and cement are the sectors that show lack of demand and that too is not the case here.The prices of real estate get halved or so from the peak rather than adjusting only slightly to match the demand and supply for the time being. This too is not the case here.

Why then the markets should behave like they are behaving. I think this is mostly on account of the fatigue factor for the markets ran very fast , for far too long without respite . They had to take some breather. This came along with a combination of factors and some doses of downright misguidance from the so called analysts and technical chart readers. I have never seen the chartists to say rightly the impending mood of the market but have the explanation ready post fact. The juncture chosen for it is the intervening period between the two quarter where the results are absent for almost a month and a half.

There is no doubt that Indian economy has traditionally been suffering from slow down after every two and half to three and a half year of good run for half the period of slow down. This is not any more the case in view of the integration with world economies to a greater extent , IT initiative, new found confidence ( China taken as an example), the demographic factor ( of average younger population), reforms undergone, abundance of capital and the need to catch up with peers. Here, the entrepreneurship of the Indian businessmen also had chance to demonstrate to world that they are second to none. So the set cyclic pattern holds good no more.

The inflation has been termed as making market weaker but in fact it is the inflation that will prove to be its best friend. Why should a businessmen suffer by the higher inflation numbers only if he is not going o be taxed more. Another area where he has fear is his depreciation of plant and machinery not being covered fully (to the extent of replacement cost ) by the extra-profits generated. This is also not the case in India.

Supposing the profit growth does not remain as high as in recent past, it will still be very strong.

Now the question how low the prices of companies may go down. There is an interesting point to note. In case of commodities businesses we can apply thumb rule. It is that if a company is in to the metals and commodities and was set up prior to 1990, it can be safely valued at about eight times of book value. The only exception should be a company bleeding on account of losses year after year. Luckily there are no such companies in nifty fold. This valuation has become more concrete after the recent surge in cement and steel and other metal prices which go in to the construction of the manufacturing facility. This price improvement works as a barrier for the new entrants.

The FMCG companies also deserve to be valued at eight times of book value due to the brands owned by them . Here again the companies should be profitable and old established. We have number of such companies in nifty.

Thirdly, the banking and finance companies should have the valuation to the minimum extent of at par with book value and to the extent of up to four times of book value in case of companies with strong brand and with good growth rate. We have both types in nifty.

The cap-goods companies have to be valued lower than they actually trade for. Because their asset base is not all that strong , the brand does not matter so much and they are also competition prone.

The auto-manufacturers have asset base and the possession of valuable design and brand value. They how ever suffer heavily in times of slow down and hence should valued slightly conservatively and process has already been undergone by market.

Pharma companies should always be taken at the value offered in market because they can’t be rightly valued ever and historically have given returns better than the most sectors.

The previously given valuation parameters cover most of the spectrum of nifty companies. By these we can see that the chances of nifty drifting below by more than 7% is a remote possibility. The possibility of its advancing by 100% in next two to three years should however not be questioned. The inflation will have only two ways i.e. going up or going down. I don’t think there is problem either way. The sobering of the interest rates is a must in view of the recent lowering of interest by the BoE and BoJ. When the lowering of interest rates happens here the markets will have difficulty in staying range bound and will break out with a force.

There is one more matter supporting the market. It is of public new found love for Unit Linked Plans which garner about Rs.70000 crs every year. This finds way in to market without the fund manager having to say any thing, only a small portion goes in to debt securities.

On Friday last i.e. 17 Aug 07 the US Fed slashed rate at which it lends to banks and resultantly the US markets edged up. Back home the markets have been under pressure. In fact, the left’s stand on the Nuke deal has more to do with it now than the sub-prime crisis in US. The political scene has unfolded as it always does when the coalition govts. pass their three years period and the shadow of the next elections cast over the political scene. One thing or the other has to be found to upset the apple cart. How else the sworn enemies would explain the nearness in spite of the basic ideological differences. The solidarity this time emanated from the need of keeping the NDA alliance from getting in to drivers seat of which the BJP is the first party. In fact, the last regime delivered too under Vajpayee’s leadership. In fact, the SEZ initiative of UPA govt. itself was enough to spoil the party but some how the left itself was not above the criticism. About the Nuke deal with the US, nothing much and nothing concrete has come to light. The deal puts the country in to some kind of compromise is beyond doubt. Had the deal been for a certain period after which the review might have been done then of course, the practical advantages would have been talked about in favour. Let us see how things unfold.

JSW Steel is out to buy some US company for an outlay of Rs. 4000 crs. Again, the steel profits are going to be parked outside the country, like the Tata Steel’s case. Benefits to the nation can hardly be seen here too. Who can actually perceive the hidden agenda of the big players who suddenly come in to grab money?

Indian BPO exports have crossed $ 4 .5 billion mark in 06-07, going up by 47% over the year.

SBI subsidiary SBI LIFE INSURANCE has become profitable for the past two years and would be eligible for listing next year due to consecutive profits for three years otherwise ten-year period would have been required. It is being valued at over $4.5 billion and SBI’s 14000 strong branch network may give it a big push at the banks instance. SBI is very well placed with such a subsidiary in tow.

ICICI Bank would set up holding company for its insurance and MF businesses. Though cleared by IRDA and FIPB, it may get stuck with RBI as in fact the whole scheme has many contours, which may infringe RBI guidelines on Para banking. When it does see the light of the day, it will be big thing for the ICICI Banks scrip on the bourses.

The three-month low for the Sensex should be an eye opener for the optimists. It may actually test the bottom at the twelve-month low, breach of which will bring disastrous times for the equity investors.

Govts’ direct tax kitty has swollen with Rs 59 k crs until 15 Aug and is up by 44%. Govt aims at collecting a total of Rs 5.48 lac crs this year (+17%).

Indian Pharma market would be about $20b by 2010 according to McKinsey and the pharma companies have better chance of surviving the presenttroubled times.

India and Japan have agreed to sign a bilateral agreement on currency swaps. This will help in providing emergency financial liquidity in times of turbulent currency markets. India and Japan have to and in fact are coming near in many ways.

Re is continuously up on its journey and is proving to be off great stressing factor for the IT, Hotels and such other sectors. It is up by over 8% since beginning of current calendar year. This also invites a chance that the FIIs start booking profits and take back their dollars much more in numbers as the markets have given good returns over the last four years and the value of rupee is higher and gives them extra dollars on conversion back.

According to a study by ‘ENAM” the cost of manufacture in pharma products is cheaper by 35 to 40 % in India. Prabhudas Leeladhar finds auto component sector with an advantage of 25 to 30 % in this respect. Auto component exports may rise to $20 billion by 2015 against $1.8 billion now.

The cost advantage in operation of BPO and IT sectors is now receding as the staffing is a big problem area and is going to get worse.

About the markets, we may see that the index is continuously failing to cross the previous peak inspite of the result season going on. It is therefore necessary for it have another trigger to decisively do it. Such a trigger may come in the shape of lowering of the interest rates as the India is now integrated in good measure with world’s large economies and the rates there seem to have stabilised.But there may be some waiting period before it actually happens. All in all the factors are precariously balanced and requiring to keep fingers crossed. The cross over the all time high of 4239 nifty would be an important event giving the direction to market, below it would let it consolidate for an eventual jump. After all, the gross market capitalisation, for the fast growing Indian economy, has to see substantial improvement which still is way down as a percentage of GDP. Morgan Stanley study , done in Jan 06 , estimates that companies would issue capital equal to about 2% of GDP in the coming decade (it is 0.80% presently for the last eight years).

SINOSTEEL of China may put up steel production facility in India as it may get sufficient raw material supplies. Arcelor and POSCO have not yet gone back on their commitment to set up plants inspite of delays in sanctions etc.

The ad-valorem duty announced by the FM for the costlier cement has prompted some manufacturers to reduce cement prices. I see this is bad policy to introduce the ad-valorem duty in any form, as it would invite wrong practices in the industry. I do not understand what great advantage is going to achieved by such tinkering while the govt is committed to do away with all the short term and ad hoc economic management and tax collecting practices.

Tesco of UK is in talks with Munjals of Hero Honda for the retail venture here. I think the retailing sector will see bloody war of survival of the fittest kind and there investors should not jump in to committing there funds in this sector.

Gujarat is really the leader; its cement consumption at 250 kgs per head per annum is double of all India average of 125 kg. How far the eastern states keep lagging behind is any body’s guess. May be change of govt. in UP and Bihar improves the situation.

DLF is now ready to issue fresh capital to the extent of Rs 13000 crs for the public. Its intention behind the issue seems only to get evaluation mark for the promoters worth as otherwise it wanted to list some years back and found short changing the small investors now it is overflowing with love the same investor category. I doubt if the post issue gains would be much.